Competition Reduces the Risk of Information Asymmetry

Though it may make sense in some countries, I’m not in favor of the state providing for health. But having lived with the mess of the US private medical insurance I do believe that this is one service that the state should provide, and Australia is a good example.

It is unfortunate that in the US, this last year the state has had to bail out some capitalist. This does not reflect very well on some parts of private enterprise.

My opinion is that done properly, there is no substitute for the power of competition. For example, looking at electric cars, competition allows us to know that GM Volt’s 40 miles per charge is a dud, because we know that another management team, Tesla, has achieved 244 miles per charge.

Without competition there is this opacity of internal business management. We really have no idea what is going on in a company, and can only infer that maybe management is good, bad or ugly. It is an information asymmetry.

Competition reduces the risk of this information asymmetry and enables us, without much effort on our part, to quickly figure out which is the better management team. In this case it is obvious that it is Tesla without a doubt. So I would not pay top dollar for the GM management team.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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‘Profits Today’ versus ‘A Future Tomorrow’

I read both WSJ and NY Times. One leans right and the other left. Unfortunately, many times the rantings (both legitimate and not) make it difficult to wade through the discussions.

I think an important aspect of corporate governance is mission. When corporations lose sight of their mission and focus solely on profitability as their only yardstick then anything goes.

For example if AIG had stuck to insurance as their mission, their means of delivering profits, and therefore wealth, AIG would be a very strong company today.

Another example is GM (I’m inferring a lot from the news articles and I might be wrong but time will tell).

At some point in their history GM prided itself for its differentiation strategy. It knew of every nook and cranny of the auto market, but today by way of profitability, GM is essentially an SUV/truck company.

GM lost sight of its need, its mission, to satisfy the transportation needs of the American public, and set its sights on profits at any expense. In a sense we can say that GM allowed SUV/trucks to subsidize the other segments of its business.

Worse still, its development of the electric car (in my opinion) is something to appease stakeholders. GM’s electric car, the Volt, is not a serious contender for the consumer market as it does only 40 miles on a charge.  The average American drives 33 miles per day. (So you know why 40 miles per charge!) Note these are averages, so a Volt owner is going to be severely restricted ie don’t sell your first car. The need to keep your first car is going to reduce the potential market even further.

Compare this with the Tesla at 244 miles per charge. So the Volt is a dud.

The same can be said of the banking industry, sub-prime is a dud. And probably securitization as we have know it.

Once you control a juggernaut, making profits by itself is easy, just don’t reinvest in your future and you will look good for a while. In brand management this is called ‘milking’.

Corporate governance needs to deal with two issues, (1) staying focused i.e. missions, and (2) seek a balance or to temper “profits today” with “a future tomorrow”.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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